Sunday, January 18, 2009

Governments Should Panic - People are Saving Money

The inspiration for this post is the first article that grabbed by attention today, and it was a real attention grabber. For those who think that this blog is pessimistic, this is Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club quoted in the Telegraph:
My concern is that people don't fully understand the dangers lurking out there. The Bank of England needs to move towards quantitative easing immediately – you don't have to wait until you get to zero per cent interest rates. If someone is choking to death you don't think twice about giving them an emergency tracheotomy. There may be dangers, yes, but the alternative is that they die.
These are indeed dramatic words. The interesting point here is that the ITEM club uses the same forecasting model as the UK treasury. As such, the government will be seeing the same flashing warning lights. I have visited the ITEM club website to get more detail on their report, but nothing has been published yet. However, there are several points that stick out in the article, and it is these that have grabbed my attention. In my last post, I was considering the problem with mainstream economics, and the report on the ITEM club thinking relates to this.

The following is apparently one of the great concerns for the ITEM club:
We are now in danger of seeing the economy choke: and once you get into a situation where people are hoarding as much cash as you can throw at them and interest rates are stuck at zero, you're in real, real trouble.
The reason why I looked for a report on their website was to try to clarify their concerns expressed here. It is not clear whether their concern is the interest rates or consumer spending, or a combination of the two.

However, I will proceed with my best interpretation. The interpretation I am using is that their concern arises that people are not spending despite interest rates offering no real return on their money. Bearing in mind that their concern is deflation, they seem to be imagining that people are 'hoarding' cash in the expectation that prices will drop further in the future. In making such a statement, I have a feeling that they are imagining the mythical 'homo economicus'. This is the idea that people will make rational economic decisions. Anyone who knows of people loaded up with consumer credit will know that this is indeed a mythical creature.

According to the ITEM club, what consumers apparently are doing is sitting on piles of cash so that they can buy things cheaper in the future. It appears that the man in the street is listening to the economists, and actively withholding their spending until prices fall.

However, this is to ignore another impact of the current economic position. Every day that goes by, there are more and more headlines of job losses and falling house prices. Might it not be more likely that consumers are not spending for the following reasons:
  1. Many will be scared. With mounting job losses, many people will fear for their jobs. Such fear is hardly likely to be an encouragement to spending...
  2. Even those in work who are reasonably confident will see that there are pay freezes, working hour reductions and so forth. In such an environment, in such a climate, many will know that their annual pay rise is likely to be modest. Their expectations of their likely future wealth will be dropping. Again, hardly an encouragement to consumer spending.
  3. House price falls. Many people saw the increase in the value of their homes as a safety cushion, offering a sense of security for their profligate spending. With the rapid disappearance of the safety blanket, they will not be inclined to spend so much....
  4. I think the ITEM club imagines a world in which, like themselves, everybody is on a salary such that, barring redundancy, their income is fixed. However, this is to ignore the many independent tradesman and self-employed, many of whom will actually see their income dropping, even though they may not be unemployed. People with falling incomes, and insecurity about where their next work will come from are hardly likely to be spending.
In general, I simply do not believe in Homo Economicus. However, I do believe that he can make an appearance when there is no other option.

In all of these cases that I have provided, a more rational approach to finances is being forced upon people through fear for their own individual prospects. I would suggest that, for the majority of individuals, saving to await price falls is an economist's fantasy. Last Christmas it was proposed that consumers held off spending until the last moment in a big game of 'chicken' with the retailers. Apparently, they held back from spending because collectively they were waiting for the retailers to drop prices in their desperation to get custom. I think there may be a very small element of truth in this, but would suggest that most consumers held off because of fear (for the reasons given above), and finally caved in because an emotional sense that they wanted a 'good Christmas'.

Christmas is also a good broader illustration of the irrationality of individuals. The UK is largely a secular society, such that Christmas have very little religious significance. As such the persistence of spending so much money on presents and the other rituals of Christmas is irrational. Every consumer knows that on Boxing Day, prices will tumble. Despite this, they spend large amounts of money just before they know that prices will see massive falls. Without a religious driver, this is nothing to do with rationality - but to do with sentiment and emotion.

This whole argument about consumers deferring their spending to make savings later is actually flying in the face of the history of the last ten to twenty years (at least). The boom in credit is the exact opposite of this deferral, as people have spent before having the money and therefore have purchased at greater cost.

However, this is the justification for many of the actions of government. The deflationary theory is built upon the premise that, if consumers have an expectation of falling prices, they will defer consumption. However, as the Christmas example, and the experience of the massive growth in consumer credit suggests, this is the exact opposite of the behaviour of many consumers. Whilst there may be a number of consumers out there who are so thoughtful and rational, it is impossible to argue with the fact that huge numbers of people have been buying on credit, and therefore consume on an irrational basis.

According to the deflationary theory, this consumer behaviour has magically flipped. Why would consumers suddenly get so wise?

The real explanation for deflation is the combination of actual shrinking incomes, and fear of shrinking incomes. This means that consumers do not have as much money to spend, or fear to spend what they have. As such, every provider of consumption goods or services must work harder to gain a share of the shrinking market, including offering discounts. Those that provide goods and services to consumers are also in a battle with rational fear, and seek to overcome that fear with the prospect of ever more attractive prices.

This is the cause of deflation. Rational fear and less money available for consumption. Whilst this will create a downward spiral, it is not a spiral driven by expectations of falling prices.

It is somewhat surprising how much assumption there is in a couple of paragraphs from the ITEM club, but there is an even greater and more contentious assumption. As I have already gone into such a lengthy discourse, I will re quote the second paragraph, which concerns the second point that I would like to make:
We are now in danger of seeing the economy choke: and once you get into a situation where people are hoarding as much cash as you can throw at them and interest rates are stuck at zero, you're in real, real trouble.
At this point, I will ask you to not read on for a moment. Before reading on, see if you can spot the emotive descriptors in the paragraph. Re-read the paragraph with this in mind, and I hope you will spot a most curious expression.

In case you did not get it, the key word here is 'hoarding'. Consumers are not 'saving' money, but instead are 'hoarding' money. Hoarding is what dragons, pirates and greedy kings do with gold. Hoarding is a 'bad thing'.

However, if we rephrase the paragraph as follows, then we see a very different picture:
We are now in danger of seeing the economy choke: and once you get into a situation where people are saving as much cash as you can throw at them and interest rates are stuck at zero, you're in real, real trouble.
What we are now seeing is an argument that says that saving is a bad thing and is the destruction of the economy. If people save 'you're in real, real trouble'. The solution to this real trouble that they are proposing is quantitative easing, or printing money.

In printing money, they will relight the fires of inflation, and that inflation will apparently get consumers spending again. However, such an assumption is built upon several other assumptions.

The first of these I have already detailed - the assumption that consumers are not spending because their minds have magically flipped such that, all of a sudden, they have learnt to defer spending so that they can achieve savings.

The second assumption that they make is that spending money today is better for the economy than saving money. This ignores the fact that savings are what provides the pool of new and genuine capital for businesses to utilise in order for them to expand and grow business (note: the process of central bank money creation does not provide this, but merely shifts value from one place to another). The banks have previously lent foolishly, thereby destroying their capital base, thereby creating a situation in which they need to repair their capital base, thereby meaning that there is a shortage of credit. In order for this position to be rectified, they actually need consumer deposits. That means they need consumers to save.

Furthermore, it is very puzzling that saving might be seen as a bad thing under any circumstances. Saving is rational consumer behaviour. If a consumer saves money, they will gain interest on those savings (except where the government sets an interest rate in which no return is possible), and will therefore increase their future purchasing power. This means that they will be able to buy more with their money than they otherwise would be able to buy. In addition, this feeds into benefits in the wider economy, as has already been pointed out, by making more capital available for investment. The greater the availability of capital for investment, the cheaper the cost of capital, and the greater the profits for business.

Is this not a virtuous circle? Investment of wealth into business creates jobs, which creates income for individuals, which creates wealth for consumption and further investment...

There are two problems at present with the switch to savings. One is that savings have been very low, such that consumers have to make up for their past lack of savings. The second problem is the flipside of this - that there has been too much debt driven consumption, and that debt driven consumption can only go so far before the weight of debt becomes unsustainable. There must come a point in time at which consumers will have to start paying down debt, and at that time, overall spending will have to decrease. In such a situation there must be a contraction in consumer activity, which means that economic activity must contract, which means that unemployment must rise, incomes are likely to drop (or at least not grow), and there will therefore be greater competition for less money, which will mean more competition on prices, which means deflationary pressures.

I say these are problems, but in reality the problems are arising due to previous problems, and are actually a necessary price for them. The contraction is necessary, but it will be painful. In this sense they are problems to live with (in that they will cause hardship) but are also a correction of (and solution to) the previous problems.

As a note I have discussed before about the counter-effect of a falling currency on prices, so will not detail this point again here. My focus here is primarily on the issue of savings and deflation, and the assumptions that underlie the ITEM club thinking, and the thinking of many mainstream economists.

The key points here are that the theory of the mechanism of deflation makes a basic assumption that is not supported by the recent behaviour of consumers, and it exactly the opposite of the way that they have behaved for a very long time. The second point is that there is an assumption that saving is a bad thing for an economy, and that consumption, at whatever cost, is a good thing.

In my last post, I pointed out how there was a fetish amongst many economists for activity. Activity, by their reckoning, in any form, is a good thing - even to the point where the economic activity resultant from the destruction of Hurricane Katrina is seen as positive economic activity.

Such fetishistic obsession with activity is at the heart of the ITEM club thinking. Their primary concern is to get consumers spending again, and if that means spending borrowed money, this is not important. The fact that spending borrowed money is unsustainable is not taken into account. In the past, the borrowing was funded to a large measure by overseas lending. Their solution, in the absence of the overseas capital is to print money to lend to individuals and businesses in the hope that this will generate activity. However, such money adds absolutely no value to the economy overall, it merely moves the value of the existing money onto the printed money (which moves to the government).

Such an action is therefore simply a tax on savings and investments, meaning that the amount of capital available for investment is diminished. Not only does it destroy the value of the savings that are in place, it also is aimed at encouraging people not to save, such that the recovery of the level of capital to allow for new investment will be restricted.

What we are looking at is a situation in which the purpose of the ITEM club policy is to create an environment in which they are seeking to overcome the rational fear of consumers by destroying the value of savings - to such an extent that it is simply not worth holding money. This destruction of the value of money will encourage consumers to spend money as soon as they get it, thereby encouraging consumption.

This sounds like massive inflation, does it not?

The views of the ITEM club are not unique. Their views are a mirror of the views of governments, with the main difference in their thinking being a sense of urgency to destroy incentives to save.

There are two puzzles in all of this. The first puzzle is how anyone can believe that people saving is a bad thing. Whilst it might see further economic contraction in the short term, it is necessary to create a foundation for future recovery. Any policy which is aimed at prevention of saving is a policy that is aimed at the 'now' but at the cost of the future. The second puzzle is why on earth economists think that consumers will defer spending for cheaper prices tommorrow, when the evidence points in the other direction and where there are far more plausible explanations for why consumers are not spending. Their theory of deflation is just very odd.

When we look at the two paragraphs from the ITEM club, we can see that there is a considerable amount of assumption in their thinking. However, those assumptions, when examined, are most curious and rather muddled. When we think of government policy, we must bear in mind that their thinking will be along the same lines, even to the extent that they are using the same models.

It is more than a little bit worrying.

Note1: I have re-read my post, and I am hoping that my explanation is clear and consistent. If not, please feel free to post comments and, time allowing, I will try to clarify the points.

Note 2: Lord Keynes has responded to my reply to his comment on my last post (that is rather a mouthfull - sorry). I will try to address the points made, but do not want to go further into what the 'right' level of expenditure on education might be which, as I will explain, is a diversion (to which I previously succumbed). I do think that Lord Keynes is missing the central point, which is that if x amount of spending on education was a bad thing yesterday, why is it a good thing today? Either it was wrong yesterday, or it is wrong today. I have perhaps not explained myself well enough, so will seek to clarify my thinking.

When Keynesianism comes out of the closet, it is quite astounding how much underinvestment is suddenly recognised. Seemingly, huge tracts of previous underfunding is discovered in coincidence with the 'need' for Keynesian spending schemes. It is also noteworthy that everyone has their own pet projects that have apparently been neglected, such as public transport, green energy, education and so forth. All of these projects become 'investments', but the curiosity is that they were not deemed good investments yesterday....

In other words, the Keynesian spending becomes the route for everyone to overturn previous spending restriction on what different individuals think is important. Every one of these projects can suddenly find justifications, but these justifications were not sufficient to win the argument yesterday, at a time when there was more finance available for the project. I could get into a similar debate for any one of the wide range of spending plans and meet exactly the same level of argument and justification for each of the plans. I could devote huge amounts of time on this blog in endless arguments about the relative benefits of every one of the projects being mooted for expenditure.

The point here is that it may, or may not be, correct that one individual project is a 'good thing', but it is an absolute certainty that much of the expenditure will not go to worthwhile activity. It can not be the case that all the previous restrictions on spending were wrong.

In particular, there is a point at which government spending just becomes a wasteful drain on the economy. Otherwise, government spending could rise perpetually with no negative impact upon the economy, and only positive impacts. It is possible to argue about that level, but if we accepted the level yesterday, why should be not it accept it today?

If we do not accept this principle, if we think that government expenditure could perpetually rise and benefit the economy, we would have to accept that the government that spent the most would have the most successful economy. This is not a case of reductio ad absurdum. Caps on government spending are there so that the expenditure of government does not (in principle) lead to wasteful expenditure. Keynesian economics is the removal of those caps. If something is deemed worthy of investment, meaning that it is believed to have potential for a return greater than the capital expenditure, then it would already be funded.

Such is politics that, even without the excuse of Keynesian economics, not all government spending is necessarily justifiable, though that is a wider issue than the additional spending than the argument over Keynesianism, and is beyond the scope here. What is at issue here is why previous thought on what was an acceptable level of expenditure can suddenly, as if by magic, be overturned.

At the heart of this is that I would argue that the more a government spends, the more likely it is to waste money, though some might argue that this is not the case. If a person believes that higher government spending = greater economic success, then their starting point and mine are a long way apart, and I would have to offer a very long discourse to put my case forward. It is beyond the scope of this reply to offer such a case.

Returning to Keynesianism, at a time when there is less finance available, to increase government spending is quite simply mad. In doing so, what were previously likely to be, at the very best, marginal benefits from expenditure suddenly become compelling arguments for expenditure. This simply does not make sense.

These now 'compelling' arguments come at the cost of either massive increases in government borrowing, or printing money. This is done for projects that were yesterday deemed as being at best of marginal worth....As I said, madness, as the spending now will mean less money for spending in the future on projects which are considered to have greater potential than marginal benefits. However, many of the projects that are now being funded would normally have been dismissed as a waste of money, but are still going to be funded. In spending on projects deemed to have questionable benefits now, there will be less money in the future for projects with more assured benefits.

The choice is very simple. Waste money now on projects whose benefits are questionable or with very little benefit, or do not waste money now and have more money for better projects in the future. Which is to be?


Note 2: I have had a very interesting comment from Pete Murphy on my last post, and strongly recommend that you read it. I have often had a vague notion that the US trend of building so called MacMansions (huge houses) was a driver of consumption. However, I never thought about it in the wider context of Pete's discussion. What he says intutively makes a lot of sense, though I am still contemplating his argument on free trade. If I have time, I will try to take a look at the book he has written on the subject (as a note for Pete, I do not consider mention of your own book on economics as being spam, though if you had linked to Amazon that would be different. Your comments and mention of your work are welcome).

13 comments:

  1. A quick clarification. In my discussion of Keynesian economics I discuss waste and government spending. You will note that I do not say what is an acceptable level of spending overall.

    It is very difficult to say what the 'right' level might be. Each country has different political systems, different public service cultures, different structures and so forth. As such we can see some countries with high levels of government expenditure where their economies seem to do well regardless. However, we can see other cases where this is not the case.

    What makes one economy work under x circumstance and another not work is a big subject. There is no formulaic answer.

    However, if a particular economy believed that yesterday x was the right amount of government expenditure without waste, why would they think that a massive increase would not lead to waste?

    There is more that could be said on this subject, but I will leave it there for now. At least I am hoping that, at this stage, I have at least stimulated some doubts over the merits of Keynesian economics.

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  2. Another reason consumers aren't spending. A significant number of them are baby boomers, and they are preparing to retire. Suddenly, the giant nest egg they thought they had has been cut in half and they are unsure about medical care, etc. Now that they are fearful and uncertain about their retirement my guess is no amount of credit card offers are going to bring them back. They will focus on savings.

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  3. I always thought Keynesian economics said to save (run surplus') during the good times and spend on the big projects in the bad times when the economy needs to refocus itself and be stimulated.

    unfortunately today it seems to mean, spend (run deficits) during the good times and the bad times which obviously has some flaws, but the original theory seems fine.

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  4. Thank you Cynicus, once again your posting sets my nocturnal worrying into some sort of order.

    It's startling that the debt beast is now going to plunder the savings of the wise &/or privileged. I've been at least one of those things hitherto and I'm running out of good ideas for financial survival.

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  5. Why British people are saving money? Your arguments are rather convincing but the MAIN logical reason must be the fact that the actual deflation lulls the majority in believing that GPB cannot sink further.
    The fact that the GBP’s value plummeted in the last two years and the sure perspective of a ramping inflation - with the BoE printing more money - is not generally realized, yet.

    If I were a disillusioned British citizen, first I would change my money in other more solid (at the moment) currencies as a temporary way to protect my saving. I say "temporary" because for the time being the GPB is the most likely candidate to collapse. I don’t know what will follow after that to currencies such as Euro and the US$. I am rather pessimistic… Perhaps gold and/or canned food could be a much better investment than worthless pieces of paper. :-) But that’s another subject.

    Second, I would try to take advantage of the temporarily cheap goods to buy what I need now, knowing that tomorrow it will be too expensive.

    Saving - in GPB I mean - does not make sense at all if one sees clearly the tempest coming.
    Regards,

    Phil

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  6. Sorry, only now I see that I wrote three times GPB instead of GBP :-)
    Phil

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  7. Another facet of the insoluble conundrum of economics: while inflation is a tax on everyone holding money or earning a wage, deflation hits debtors in particular and lowers wages among certain groups of workers by creating unemployment. There is no specifically economic reason to prefer inflation, deflation, or even stable prices; however, there are social ramifications to each. The political impact of a sudden swing to deflation - accompanied by bank failures, asset destruction, and unemployment - are profound. One example is the impact of falling asset prices on pools of retirement capital. Deflation is a virtual death sentence for the baby boom generation's retirement. Similarly, it brings about both a nominal, and (initially) a real fall in government revenue. This necessitates a massive budgetary restructuring (mostly cuts in spending) that is possible in theory but which, in practice, lacks any constituency. Those of us who are older can recall the Reagan-Thatcher era howls of protest about inflation which emanated from conservative elements in the bourgeoisie; their particular ox was being gored by the phenomenon. Now the shoe is on the other foot, so to speak, and turnabout is fair play.

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  8. It's not just people saving, its also people paying off housing (and other debts) with savings rather than consuming due to the penny finally dropping about debt due to the housing bubble bursting and the shock of the banks being in trouble.

    There is also other things at work that make me wonder about the way the Governments are reacting. For example according to this:-

    http://www.telegraph.co.uk/finance/4229198/Shipping-rates-hit-zero-as-trade-sinks.html

    World shipping has come to a major halt with ships offering zero rates. "Offering slots for free is akin to an airline giving away spare seats for nothing in the hope of making something from meals and fees."

    Materials are not getting to factories, finished goods are not getting to stores. "This is no regular cycle slowdown, but a complete collapse in foreign demand,"

    If the shipping is neglected and allowed to completely collapse because of trying to keep the banks afloat, how are there going to be the goods available for any kind of stimulus?

    How is this not on the front page of every newspaper? World trade has practically stopped, soon factories will halt due to lack of raw materials due to the globalisation of trade, same for shops for the same reason, unless the factories or retailers use local stock. Who cares if the banks go broke if there aren't enough goods to buy?

    I just hope there is an economy left for the "saved" banks to lend into.

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  9. Many thanks for your crystal clear writings on a subject I am still struggling to understand. Mostly, I'm struggling to understand the attitude of the government.

    With an unending tide of bad news pouring from the radio, tv and press, surely it's natural for people to hoard their cash and / or reduce their debt exposure. Why on earth would anyone do otherwise? Isn't that completely bleeding obvious?

    I develop web-shops for retailer brands some of whom report high street sales are going through the floor and who are relying on web-sales to hold steady. A typical and recurring comment from my clients is "no one with any sense is spending any money".

    Some of my clients, hearing the same unceasing stream of bad news, simply held on to the extra margin provided by the VAT cut, which was expensive to implement, as any direct costs, such as web-hosting, programming and mass emailing, provided by US companies, have increased 30% with the falling pound.

    Several things puzzle me. I am a complete economics ignoramus and so these questions might be very stupid. However: since the failure of Northern Rock in the UK, it appeared obvious that the banks' balance sheets were works of fiction. In recapitalizing banks, why were there no strings attached by the government in the form of actually setting up a body to audit UK banks' balance sheets - or is that just a fanciful idea of mine? I hear today on the news that with the second UK bailout now taking place, this thought is now occurring to finance ministers. If I remortgaged my house to lend a friend of mine £100,000 I would quite like to take a look at his outgoings and obligations, before I handed over any money.

    Secondly since it is government policy to require the banks to return to (unwise) lending, why wasn't this a condition of the loans made to the banks in the first place? Did they only think of this after they'd handed over the cash?

    Thirdly: is the problem about lending actually the fact that the banks don't trust each other, post the various bank failures? What would happen if you let the bad banks go to the wall? Would that clean out the system, and allow lending to resume, or would it be too destructive?

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  10. CE,

    You covered a lot of ground on this post. Nice analysis on the 'inflammatory' wording. D Bob Gowin created a useful V heuristic which linked Theory and Practice. Ref at end of post.

    One matter which always puzzled me was the behaviour of allegedly intelligent persons: the top 10%. They are genuinely bright, but behave arrogantly and badly. I eventually sussed the reason. They know, with 100% certainty that they are right - they are afterall the Top 10. Axiomatically all the rest of us 'inferior contrarians' are wrong. Hence, we can be dismissed out-of-hand and ignored with impunity.

    Keep this in mind every time you hear/see any of these gobshites on radio/TV, or read any of their academic claptrap. They are Monorail thinkers.

    Keep up with the emphasis on the dreadful affect of debt during a deflationary spiral. Debt crushes people. Homeless people do not usually riot, but destitute and hungry persons assuredly will.

    Each time I post a comment on a blog I state my Economic Model-in-Use: Flatland = annual negative GDP of -0.0x%.

    Try try get all contributors to state their Economic Model-in-Use. You can then judge whether or not their contributions are congruent with their Model-in-Use.

    Brian P


    Ref: Educating
    D. Bob Gowin
    Cornell U Press (1981)
    ISBN: 0-8014-9442-7 paper

    Learning How to Learn
    Joseph Novak + D Bob Gowin
    Cambridge U Press (1984)
    ISBN: 0-521-31926-9 paper

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  11. There are several reasons for saving.

    Your car is getting old and needs replacing, and you have no chance of getting a loan to help spread the cost of a new one, so you save...

    You're a would-be first time house buyer, and you're saving for the 40% deposit which will soon be the norm...

    You're the owner of a house which is now worth less than your mortgage, so you save...

    You're still suffering from the effects of last year's high fuel prices (and continued high utility prices, so you're saving to pay the winter gas and electricity bills, etc)...

    And so on.

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  12. It just goes from bad to worse.

    A few years ago, I recall that UK banks, at a time when they were amassing truly astronomical profits, successfully persuaded government not to impose a 'windfall' tax upon them. Now, following the total loss of those same astronomical profits along with additional hitherto undiclosed losses (toxic debts) occasioned by profligate, fraudulent banking practices, we the public are expected to foot the bill. Nobody, apart it seems from Cynicus and contributors to this blog, is even blinking at such prospects.

    It seems that times of excess and disaster are 'win win' situations for the banks who win both in times of profit and profligacy and 'lose lose' for the public who lose in both situations. What confidence can the public have in a system that condones such practices?

    If this was not bad enough, the information on the following link implies that we are heading towards an even greater catastrophe:

    http://www.marketoracle.co.uk/Article8320.html

    If this commentator can be trusted, hyperinflation is already affecting the People's Republic of China, an area in which Cynicus has considerable personal experience. Hyperinflation is happening to such an extent that the Politburo will soon need to decide whether to continue to meddle with its currency or to offload vasts bundles of its foreign currency reserves onto the markets, thus heralding the collapse of the US Dollar, the World's reserve currency.

    The reaction of Uncle Sam to such an event?? Perhaps, there is merit in the Book of revelations afterall??

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  13. Spot on about fear! Though I'm in a reasonably secure job, I'm expecting my real income to fall in the next 2 years, one way or another. I'm neither hoarding nor saving though: I'm trying to cut my spending in order to live within my income. If I can, I'll repay some debt. I want to get out of debt, or at least stabilise it, whilst my credit rating is still reasonably good and I'm still in control of the process - rather than wait for the banks to which I owe money to get nasty.

    If high inflation is coming, this is irrational of me: I should just wait for my debt to be devalued for me. But I'm worried now, and want to get to a position of financial safety now.

    Since living within my income will mean cutting my consumption significantly, and paying off my debts will mean cutting it even further, I can quite see that govt wouldn't want everyone to do the same as me - but tough.

    I suppose govt may have accepted privately that the new norm will be way below "2007 levels", and may just be trying to prevent the necessary adjustment from destroying the country's productive capacity, but media coverage seems to suggest they are seriously trying to get us back to 2007 using printed money instead of foreign loans.

    Re your note on Keynesian spending, would you accept that it might be sensible for govt to bring already-planned expenditure forward i.e. spend it now instead of in 2 or 3 years' time?

    ReplyDelete

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